“No other country has the equivalent of the private-public model of Fannie Mae and Freddie Mac—crony capitalism at its best.

The solution is straightforward: The public-private hybrid of Fannie and Freddie—“government-sponsored entities”—should be abolished, their existing business sold or liquidated, and the mortgage market privatized. This can be done in a few easy steps.

The current $686,000 cap on new mortgages guaranteed by Fannie and Freddie should be reduced by $100,000 a year. This would put the companies out of originating new mortgages within seven years.”

Messrs. Isaac and Kovacevich are evidently calling for the elimination of Fannie Mae and Freddie Mac. This recommendation from Mr. K is not at all surprising because the TBTF banks have been circling Fan/Fred like crazed vultures ever since the US Government seized the two companies.

However, Mr. Isaac seems to have a new — and completely different — outlook on Fannie and Freddie. Perhaps, FTI Consulting (Isaac’s employer) has a new client that wants to see the demise of Fan/Fred.

“By diverting all profits away from the GSEs, FHFA effectively precluded any ability of the companies to boost their capital levels and over time “earn” their way out of conservatorship. Moreover, the profit sweep contradicts FHFA’s mandate to “preserve and protect” enterprise assets and property.

Such public-private partnerships at times of crisis require consistency in the federal government’s respect for, and protection of, private property rights. No private party will put capital at risk if they think the government can take it away from them in conservatorship or bankruptcy, however noble the underlying policy goals or inspiring the associated political rhetoric.

But the conservatorships have left the enterprises in a state of suspended animation; neither private nor public entity and yet their business must continue. The government’s decision to violate HERA in 2012 by invoking the so-called “profit sweep” has deprived the GSEs of their ability to rebuild capital and has put taxpayers at greater risk. It also undermines the government’s role in times of future crisis. If private capital can’t count on the rule of law, it won’t participate in the future and taxpayers will have to pick up the pieces of what’s left of the financial system.”

“This action by the Administration created the worst of all worlds. Instead of trying to restore the companies to health, as HERA requires, the government’s actions stripped Fannie and Freddie of all their capital. The result: They again pose a substantial risk to taxpayers.

When faced with litigation and demands from the public to know why it took this action, the government initially told the courts that the profit giveaway was intended to save the companies and avoid an upcoming “death spiral.” But documents released in litigation have proven that assertion to be false. The truth, it seems, is that the profit giveaway was intended to facilitate the companies’ demise while providing windfall profits for the Treasury. As former Treasury Secretary Geithner colorfully testified, the government actually wanted to dismember the companies.

Even to a layperson, dismemberment does not heed the mandate of a conservator to restore the companies to sound condition and preserve their assets.

By the FHFA’s own admission and the government’s newly concocted litigation rationale, the government’s goal in stripping the companies of future profits was to fill the government’s coffers while ushering in the demise of Fannie and Freddie. But despite its supposed intent to wind the companies down, the government is keeping them alive and stripping them of all of their capital. This is incompatible with both current law and millennia of conservatorship history.

While taxpayer protection may sound good, it does not relieve the FHFA of its legal obligations to place the companies in sound condition, preserve their assets, and restore them to normal operations.”

$omething must have happened between February and December that Mr. I$aac would go from saying, “restore them to normal operations” to “should be abolished.”

One wonder$ what motivate$ $omeone to change their “expert opinion” so dra$tically, so $wiftly…

Call me old fashioned but regardless of your view of public policy in this matter this is an abuse of power by the government and in my mind the government has broken the law and should be held accountable. in order for Capitalism to work their needs to be rule of law and we need to know clearly what that law is so we can make prudent business decisions. I have been in the mortgage/real estate business a long time and Fannie and Freddie always worked well and were crucial to a functioning real estate market without them we will be “up the creek without a paddle” . God help us if the banks control it. If anything Fan & Fred needed more regulation on the types of business they could do, maybe some more capital & less government meddling to serve lower income borrowers (we already have FHA ( they can do most of that). If its not broke don’t fix it – the problem with that is that a large part of the dialogue is just lies plain ans simple.

Sorry folks, but my position on Freddie and Fannie has not changed. I have always argued for the “rule of law” and continue to do so. There are two questions we need to answer: 1) what should be the future role, if any, of the government in the housing market? and 2) how should the government treat existing creditors and shareholders of Fannie and Freddie? Those questions are both addressed in the article published by Mr. Kovacevich and me. The government’s future role in housing, if any, should be focused on lower income people who need public assistance, not on people who take out mortgages anywhere close to as high as $686,000. As for existing creditors and shareholders of Fannie and Freddie, in my view they have Constitutionally protected property rights that should be respected in any resolution of Fannie and Freddie.
William M. Isaac, former Chairman FDIC

I will say that many of us were taken aback by what seemed to us as a reversal in your position. I’m sure you don’t have time to read the other posts on this blog, but I featured your work twice before. And my group viewed you as someone who saw through the Gov malfeasance.

To your credit, you have in the past stated that receivership could have been an option. Though, it was not pursued as we all know. So, your now-current position (as I interpret it) is that Fan and Fred should be abolished appears counter to your support of the mission of a conservator.

Dear William Isaac
Your response here is of no value because few guys will ever read it and you know it. The intention of your article in WSJ is doubtful at best, and probably malicious. The headline tells it all. Why didnt you use a headline like the questions 1) and 2) that you post here instead of “Winding Down Fannie and Freddie is Easier That It Seems” ???
You know that your article headline, timing and paper (WSJ) hurts the stock price. I insist in the malicious headline because , as you sure know, very few people actually read the content and even fewer understand what is it about.
You said “No other country has the equivalent of the private-public model of Fannie Mae and Freddie Mac” – Malicious again ! -you stop short from saying that no other country has the housing level of America! In the rest of the world the people pile up in parents or parents in law houses.
You also stop short from saying that no other country is the first economy in the world and that is in big part because the GSE are powerful engines of the economy.
$hame on you I$aac! .

not to mention that the average living area of a house in other countries is 1000 SF while in America it is 2000 SF . Plus the fact that only in America every single house has central heating/cooling system while this very seldom happens in the rest of the world. And so on I can name a lot of advantages that we enjoy thanks to Fannie and Freddie. In Europe people just doesnt know what is a “garage” .
Again $hame on you I$aac

Thanks for your efforts to clarify your position.
However people look for intension of the article based on many factors like :
1. Title of the article
2. Publisher (WSJ?)
3. Timing
4. Key points in the article

You also used major anti-FnF publication like WSJ for your article. On all these counts you appear to have sided with FnF opponents,

“To support their arguments for restricting Fannie and Freddie’s business or eliminating them, these opponents routinely distort the truth or simply make things up about them. Honest critics don’t do that.”
-Tim Howard ex-CFO FNMA

You need to use similar major publication or forums to clarify your views.

Please do write your articles based on true facts and that serves the best interests of the people and the country.

For his response to make any sense to me, it would seem that he is saying he has always believed they should by law be restored but, once restored, ultimately abolished. If so, it is curious why he never once, as far as I know, voiced this sentiment to wind down until now. My 2 cents.